Surveillance: Fed Hikes with Hatzius

That was where I first met Janahats is now chief economists at Goldman Sachs. He on the high ground on the last housing boom. Events are so important. We're not going to talk about that on this Friday morning with Janatis. We're gonna talk about the Golden sax call, the gloom of recession, and the global and American labor economy. Drs, thank you so much for joining us again. I've got to go to Labe. I want to go Dudley mclvey from years ago when you were a young upstart at

Goldban Sex and go back further. Your analysis on where we are now with this strange labor economy goes back to the late forties in the early fifties, that's right. So if you look at the gap between the total number of jobs and the total number of workers were we've got the most overheated labor market going back all the way to the early nineteen fifties. Best way to see it, eleven million open positions, six million unemployed workers. That five million gap is a record both in absolute

terms and relative to the size of the economy. So I think that's really what the head's going to be focused on. Politicians want un employed America. If I'm elected, free beer, if I'm elected, a job for all. What's

wrong with an overheated labor economy. Well, if it generates wage growth that's more than what you can sustain with maybe one and a half to two percent productivity growth and a two percent inflation target, then ultimately you get higher inflation that erodes the real wage of of workers. So that's ultimately not really in anybody's interests. And right now, you know wages are growing in the five to six percent range, and that is too fast. And you're not

a recession easter. You say, we think a recession is far from inevitable, but you are looking for some severe deceleration in this economy. Just laying out the forecast for US GDP a year end where you think we're gonna land and why you think the Fed will still be pushing on even with those numbers. We're expecting slow down from five and a half percent growth last year to just under two percent this year if we look at

it on a fourth quarter to fourth quarter basis. So basically from very far above trend, very strong V shaped recovery to something around the economy's trend pace, and the FED will be pushing on because the labor market is overheated and inflation is too high. So I would say that the reason, one very important part of the reason why growth is going to be slower is that the

FED is trying to slow things down. So yeah, and you'll have GDP with the one handle by year end where cp I at that point, I just want to understand the mix inflation to growth. I think CPI around five pent for you know, core PC we have a little over four four and a quarter percent, so you know, still well above the two percent target, though lower than now because I do think that some of the inflation is going to come off in the in the good

sector as we go forward. That's just mechanically we should say a mechanical peak later this year. Yeah, and I think most people are looking for that. I'm trying to work out next year just in terms of where this FED funds would peak. What would influence that call for you? What would you be looking for through the next six

to nine months. Well, I think if the economy does not slow, and if we in particular don't get a pretty substantial slowdown in employment growth, then you'd be looking at something, you know, that could go significantly higher to the four percent plus range. Our baseline is pretty close to market pricing a little over three percent, but it could be significantly higher than that if we see continued increases in this overheating. Hold on a second, Yeah, I

want to sit on that for a second. Four percent terminal FED funds rate. When do you see that being a possibility if we continue to see strength in the labor market. I think in two thousand and twenty twenty three it's a possibility. Uh. You know, again, our baseline is that by the middle of two thousand and twenty three will be at a little over three percent, but you know, there obviously risks around that. On the downside if we get a you know, much sharper tightening in

financial conditions than they want. On the upside, if the economy stays stronger, or you fail to get additional tightening and financial conditions. I mean, the goal for the FED is to bring about a gradual tightening in financial conditions. Otherwise they're not going to achieve the goals that they have, which is to stabilize the economy near full employment but not in an overheated state. So do you agree with Bill Dudley that the Fed has to essentially cause stock

prices to decline. It doesn't have to be declining stock prices, but it has to be some combination of weaker stock prices, higher interest rates, a stronger currency, and wider credit spreads, and these things, you know, can be substitute able for one another. We look at our Goldman Sachs Financial Conditions Index, and those are the different components in there. I was looking at the rates cold over a government just in terms of where treasuries will be inversion year end in

version year and next year and again the year after that. Yeah, and what would that mean from an economics perspective. Just your relationship with the race team, their co year end this year, the year after, the year after. What does that mean, Well, they build in the economy, the call from the economics team on the real economy and on monetary policy. And we have the funds rate a little over three percent and ten year yields a little under

three percent. So yes, mild inversion. I would also say that if you look at market pricing for the federal funds rate, of course that's already that already shows an inversion. Market pricing goes up to a little over three and then it comes down to about two in sort of starting in late two thousand and twenty three. So the market is saying there's a meaningful risk of renewed rate cuts because the market sees a meaningful risk of a recession.

There's a missing ingredient in this conversation, and it's the labor markets. Where you started with Tom three point five percent is where the federcent year end. Again, he around three. Given what you expect, the kind of deceleration you're looking for in the economy, the persistence of inflation as well,

the work the FED needs to do. What do you see happening and how out of sync with that gene is that unemployment target with what you're looking for, Well, we actually have the unemployment rate fall a little bit further to three and a quarter percent, despite the weaker

growth forecast. I mean, I think the three point five percent forecast from the Fed is already a little bit stale, probably just given that we're already down to three point six percent, since the summary of economic projections was this is really important though, everything you're expecting and you still expect unemployment to keep fooling. Doesn't that just tell you

that actually they've got to go high with interest rates. Well, I think they do have to go higher with interest rates, and I think you're anticipating, but possibly possibly, although it's not just about the unemployment rate. I mean, this overheating in the labor market is you know, on the demand side, it's unemployment, but it's also it's also open possessions or jobs, but also open possessions. We do expect that open possess

probably will come down somewhat. So in an ideal world, what the FED would do is slow the economy to a degree that leads companies to you know, delay or or or shelves some of their expansion. Expansion plans thereby bring down these extremely high open possessions without slowing it so much that you get substantial layoffs. And that's what that's what you're shooting for. Is that going to be you know available? Is that? Is that what actually happens? We're going to have to see it's going to I

think requires some fancy footwork from the Fed. Yeah, I see why it's a narrow path to this soft landing. How high do rates go before there's a recession? Can we handle a four percent FED funds rate without a

recession occurring in the United States? Well, I think the higher rates have to go, and especially if rates have to go significantly higher because you see even clearer signs of overheating, the higher the recession risk goals or if you go if you go up to for the risk is higher than if you're if you're in the sort of lultimate threes. Yeah, and the Twitter's lighten up here.

The emails are coming in the pandemics over One of the glimmers of joy within the pandemic was you and fair on me going back and forth with no tie on. You're coming in to day tie We need to know does Solomon force you to wear a tie today? Is this the new Solomon regime? I just wanted to celebrate that I'm coming back into this office. That's just for us. We wanted David had nothing to do with this, right, you did not have anything. Okay, there's your there's your

personal celebration. There's your bre exclusive today with Yeah, and that was a clinic. Just fantastic to get your thoughts and the hold of the table for a government tom and what they're looking at at the moment. Christina Kevin, who is what America is about? When you come out of school and you joined this strange thing called the Foreign Service. Her for tour of duty was in Paris, France,

which is heavy lifting. But for that she has spanned the world for the United States of America being a diplomat. She's US charged affairs to Ukraine. Right now, Christina, what are the ramifications to all of this? If Russia not so much takes eastern Ukraine but takes the shores of the Black Sea, what will be our diplomatic response to

something as shocking as they're taking of Odessa. Well, first of all, I would say, um, obviously, Russia's attack in the south of Ukraine and also their blockage of the Black Sea is a significant barrier to trade, not just with Ukraine but with other countries that are literal states of the Black Sea. So the economic costs are significant. Right now, the Russians have not their Their invasion of

Ukraine has not gone according to plan. I think they thought they might be able to take Odessa easily within a matter of weeks, and clearly that hasn't happened. In fact, Russia has had to pull back from uh its central position and in its approach on Keith, and so far they have not been able to get They have not been able to take Mikoliev, which is to the east of Odessa and would have to be taken before they

could take Odessa. So I would say that it's a little early to suggest that Rachel would be able to take Odessa, given the fact that they have not succeeded so far in in most of their plans. I agree that's a that's a fair statement. I'm gonna call you Ambassador because of your years of public service to the country, Ambassador. My colleague Jonathan Pharaoh ass of Turkey, the Black Sea, the boss First Straits as well. What is the present

relationship of Mr Biden and Mr er to Wan. Mr Biden, President Biden and President are er to Wan have a good relationship. They talked frequently and they talk about the many important issues that Turkey is a part of. I would say to that Turkey has been quite supportive of Ukraine. President z Lnsky also has a good relationship with President Erdowan, and Turkey has actually been hosting some of the negotiations between Ukraine and Russia. So I think Turkey has been

playing a positive role in this. And finally, as a NATO ally of course and part of a unified NATO that stands against Russian aggression. UM, Turkey has been supportive. Christina. There's been an ongoing conversation about the potential for a no fly zone or more aggressive offensive weapons given to Ukraine. There has been a shift in the type of military

weapons that are being given to Ukraine. How much do you consider this an escalation or do you think that the line that determines escalation has shifted with what we saw out of Buccha. Well, I would say, first of all, uh,

it's Russia that's causing the escalation. So what we're trying to do is help you Braine defend itself, UH, And honestly, the Ukrainian Foreign Minister has said to me more than once that any weapon that's used in Ukraine to defend Ukrainian territory is by UH its nature a defensive weapon. So what we're doing now is taking all of Ukraine's requests for various weapons systems and UH seeing how we can match them with what we have in stock and what we think Ukraine could best use right now if

we give it to them immediately. And we've already given them a very large supply of both anti air, anti tank ammunition, defensive things like body armor and other material, but we are looking at at further systems that they will be able to use to help UH not just defend against Russia, but repel them from the areas of

Ukraine that they still continue to occupy. Christinue you talked about trying to do it quickly, immediately and certainly for a Minister Khalva of Ukraine has been emphasizing the need for speed as Russia regroups. How big is this window of time? Well, we are concerned as Ukrainians have said that President Putin is UH not withdrawing but regrouping, and when he regroups UH it is believed that he may be making an offensive, a heavy offensive in the east,

perhaps in the Don Boss. So it is a relatively short period of time that Ukraine has to make sure that they're ready for that. But we since since before the war, actually we have been flowing weapons into Ukraine. In fact, several months before the war started, we had seen what Russia was starting to UH do and we started to flow weapons in before the war started, and then after the war started, of course we flow we have flowed in even more. So we're getting weapons to

Ukraine every single day. However, of course, Ukraine needs as many as they can possibly get, and we're doing our utmost to try to get them as much as we can as soon as we can. Christina, just briefly, what is the difference between defensive and offensive weaponry? What is the difference? Well, again, I would go back to US Foreign Minister Kuleba's view that any weapon that is in Ukrainian territory defending against attacks against Ukraine is by nature

a defensive weapon. Seems to be some disagreement that on that on the International SNICE though, Christina, thank you for your heart work throughout all of this. Christina Kavina Anastasia Amrosa joins his chief investment strategist at I Capital and a stage. I want to talk to you about international RELATIONSHS will save that for later in the conversation. How has your outlook changed if we begin the second quarter, Well,

thom has changed quite a bit. But one thing that actually hasn't changed is the view that I've had on cyclicals for a while, and it was not the time to chase performance on cyclicals or performance on value. So we've actually been talking to investors about rotating out of those cyclical spots, and for reasons exactly what John just talked about, which is this is not a set of bullish rate hikes. This is not a set of bullish

development that the fet is pulling back on liquidity. So I think there's a real concern right now about a slow down that is consumer lead, because things are getting too expensive and consumers may potentially be in a double wham, a situation where prices are high and the fetish hiking rates, which is making all the interest rate sensitive parts of the economy really prohibitive as well. So I think that's a big part that's been a big part of the outlook.

And now the other thing Tom that I would say we have a little bit of breathing group near term. I think given how much valuation reset that we've had in Q one, and given how much positioning reset lower that we've had in Q one, and I think we're now in the stalemate situation, whether it's inflation, whether it's your gray So barring adverse developments, I think we have a little bit of breathing room for the equity markets.

But having said that, we can't ignore the longer term risks of this consumer lead recession or slow down, whatever it may be, that are building. So now I think is the time to right size the risk in the portfolios. And so when we have those rallies, when we have the research lower and volatility, I would be using that

to actually de risk parts of the portfolio. And it says, yeah, what do you expect to start seeing a consumer lead recession or signs of it if that really does come to pass, Well, I think we're going to see in the coming quarters, probably this quarter and next at least as slow down. I mean, if you look at consumer confidence, for example, it is already at a ten year low and a one year recession probability. From this point of consumer confidences about so, I think we have some of

the indications there. We also have expectations for consumers for their own personal finances that have fallen sharply. The buying conditions for horrible goods have slumped, I want to say, to the lowest level on record. So again, I'm not surprised to see that the transportation sector is starting to feel that. So I really think we're going to start to see a slowdown in the next quarter or two.

But to have this really be a recession, I do think that the Fed has to commit a policy error and has to overtien too much into a slowing economy. It's not the base case at the moment, but I think that's definitely a risk worth watching and a risk worth hedging. Right now, what's the ballast of the portfolio? Is it the commodity sector? Is it long bonds after

they've risen the yields have risen so high, price down. Well, first we should talk about the core of the portfolio, which for most people is some sort of SMP exposure for the NASTAC exposure, and if you step back over the last two years, since January or February, the sn P is up plus and since March of we're lucky to put money to work. At that particular moment, you're a percent So that's a huge return already over the last couple of years. So it's right sizing and reducing

the risk in that. And I think one way to do that there was a time and a place to be long equities that be long only and have this one directional exposure. But now we're talking about layering some hedges and maybe you sell away some of the upside by selling a call option and you buy and use that premium to buy a put option, so you do have some sort of protection on the downside. So I think that right there is one of the more important things that investors can do. And then it's about sectors,

and then it's about where else can you get yield? Tom, what's the price to hedge right now? Is it outrageous? Is everybody on board and that they knocked up the price to hedge? No, it's not outrageous, And that's exactly why I'm talking about it today versus let's say a month ago when you had the VOCs that spiked to thirty five. That was definitely not the time to be

talking about putting on this downside protection. But now it vics you know twenty as your Oh uh, now is the time to be looking at some of those put options. I mean it gets very nuanced and very dynamic very quickly. But you want to find the points on the volatility curve where you can sell rich call premium and you can get put option that's reasonably Priced's definitely not outrageous.

Right now, we've caught on you over the years for the perspective of your heritage in the travelers you've made, particularly to the Black Sea. This is a weekend where Odessa is under unique threat to you. What is the Odessa distinction? Now? What does it mean for Ukraine? For that matter, what does it mean for Russia? Well, uh, it is uh, it is a dire situation, needless to say,

um in Ukraine. And you know, unfortunately there's been almost an international concession right now that Russia is not likely to succeed broadly in Ukraine. But it's is like Russia has a pretty good chance of succeeding in the don Bass region, in the Black Sea region, and really connecting that.

So perhaps Russia is not going to get Ukraine has the buffer zone that they were really hoping for, but it seems like it's pretty likely that they might succeed in reuniting the southeastern part of Ukraine and carving that out as the buffer zone they so desperately wanted. And I you're just awesome as always in fantastic thank you, and samros there of I capital on a situation in Ukraine and of course on the broader market as well.

Let's kick things off with Abrahim rach Bowery Globe ahead of FX analysis is City and Ebrahim, let's start right here and we price to get a slow down or something worse than that in this market. It's great to be joining you again. I think for now we're only placing in a slow down. I don't think the market is quite made up its mind whether it's going to be a recession or Josh quote unquote a growth recession.

But as we've heard from Bill Dudley among others, we do need unemployment to go up probably to contain these extremely unusual levels of in place. So for now I would say slowdown rather than a recession. But as you know, fine tuning that slowdown is going to be in incredibly difficult Abram, I want to talk about the barbell that everyone in economics is talking about, which is a hole and horse Leguard barbell. You've got Andrew hole and horse up up up on rates, You've got Laguard trying to

keep up with Powell. How do you balance the city call on rates with all of the challenges la Guard has for Euros stability? Well, I would say that as as clear as the direction of that, the the intention to tighten in the US is now and and and and Andrew has really been at the banguard for anticipating it.

I think the minutes the Easy Minutes yesterday were remarkable because I think a little less noticed has been the wocus shift by the e c D, and I think the CV has been looking at what has been happening in the West, and the minutes yesterday projected very clearly that many people at d c D things that the policy is very much in the wrong place and very much behind the curve, and they frankly have a hard time understanding themselves why d c D is still carrying

out QUEI at the time when inflation in in in the euro Zone is also north of seven percent, and unemployment is below seven percent, which by by Eurozone standards, is extremely low. So I could see lag are trying to catch up, not quite with Andrews called for the FED, but by by a longer way than markets are currently anticipated. You serted out him by saying, it's not clear whether

we're to see a slowdown or a recession. When you take a look at where the euro and where the dollar are price relative to each other, what are we pricing in versus what is going to be the slowdown and what is going to be the recession. So your euro dollar isn't in fact very directional in recessions, and whether that's global recessions or USTRA sessions, it's really only

to European recessions that it reacts very sharply. And that's what we saw in the euros and crisis in in in two thousand and ten, two thousand twelve, and and and markets are pricing in a risk of back and that's obviously linked to what's happening in energy prices and with with Ukraine Russia. So global recession isn't really the main risk for your dollar what we are looking at for for your daughter specifically, is in fact maybe more

related to the French election or a Eurocentric shock. That's what could get your dollar down to the parity type levels. If it is quote unquote just a global recession or US slowdown, there's a good chance your dollar actually will go up rather than down from the low levels that we are at. President Abraham, great to catch um body. As always, Abraham, rom Marry that have city. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern and Bloomberg Radio and Bloomberg Television each day from to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple, podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg